Photograph courtesy of Frank Kehren
Renewed optimism in GCC construction sector despite ongoing finance concerns
A survey by international law firm Pinsent Masons points to growing optimism in the Gulf construction market. However, it also suggests this could be dampened unless action is taken to address finance concerns, which continue to affect the sector.
Pinsent Masons sixth annual GCC Construction Survey found that 90% of companies perceived there to be greater optimism in the market, with 77% reporting a healthier order book for the next 12 months relative to the previous year.
However, 96% of respondents, which included some of the region's largest contractors, developers, consultants, and other stakeholders, claim that the cost of capital for projects was either as expensive (43%) or more expensive (53%) than it was in 2012. Just 4% thought the cost of capital was getting less expensive. As such, the issue of access to finance to fund projects and growth was highlighted as one of the most significant risks tempering the sector’s optimism for 2014.
Cash flow was also cited as a concern, with 62% of companies complaining of longer payment periods, although this is a reduction from the 78% of companies who expressed concern over the issue in the previous year's survey.
Commenting on the results, Sachin Kerur, Head of Gulf Region at Pinsent Masons, said:
“The GCC construction sector is clearly very positive about the outlook for the coming year. The broad base recovery in the construction market sets a solid foundation for growth to continue in 2014, but it remains crucial we capitalise on the potential of this sector at this critical juncture. A number of major projects on the immediate horizon, such as Expo 2020 and the Qatar World Cup, have added a real sense of momentum.
"However, it is important to address the issues surrounding finance. Companies are reporting that the cost of capital is more expensive, and that accessing finance for projects more generally is a concern. They also tell us that their margins are being squeezed due to rising production costs and inflationary pressures.
“With traditional forms of bank funding still less available than has been the case in the past, it is likely that the trend of going straight to investors through bond issuance and other forms of financing will grow as various players position themselves for the significant projects likely to be procured. That presents a real opportunity for investors. In some senses the state has little room to influence that, but could consider adopting standard payment terms to improve cash flow and reduce delays in payment.
“It is interesting that the proportion of respondents to our survey who expect to be involved in Public-Private Partnerships (PPP) has doubled relative to the previous year's results, reflecting an increasing recognition that this will be an important part of the mix in years ahead. We recently advised on the first-ever social housing PPP in Bahrain, and in several of the markets in which we operate we have seen renewed appetite for the sharing of risk and reward between sovereign states and private investors.
“A lack of skilled workers was cited as a major drag on growth by 50% of respondents. A business is nothing without its people and organisations need to invest in their internal development programmes ensuring they are more closely aligned to their business’ specific needs in the region, which will enable them to deliver on their strategy, drive innovation, and ultimately achieve growth. There is also a need for the GCC’s educational institutions to do more to meet the skills requirements of the industry. There should be a regular and open dialogue between universities, training providers and employers to ensure courses and programmes work for business and the economies of the region.”
James Elwen, Head of Office at Pinsent Masons in Qatar, added:
"Qatar continues to attract major investment due to the wealth of opportunities ahead of the 2022 World Cup and several major infrastructure projects to be procured as part of the Qatar National Vision 2030. This gives rise to a continuing debate on whether the construction industry could ‘overheat’ as more projects gather momentum – making the cost of delivering Qatar's vision increase as labour and materials become more expensive. However, the feedback from our survey suggests that industry players are not convinced this will be an issue."
According to the survey, construction projects in the transport sector are expected to offer the greatest opportunities in 2014. However, real estate has quickly emerged as the second most promising sector in the eyes of the industry – with 50% of respondents expecting it will provide opportunities.
Responding to questions about operating in different regional markets, 70% of companies said that the pace of market growth in Qatar had disappointed in 2013, while 73% said Abu Dhabi had disappointed. Despite the view on Abu Dhabi, the vast majority of firms (96%) stated that the UAE is the easiest market to do business within the region.